THREE-STAGE FCFE DISCOUNT MODEL
Assumptions
1. The firm is assumed to be in an extraordinary growth phase currently.
2. This extraordinary growth is expected to last for an initial period that has to be specified.
3. The growth rate declines linearly over the transition period to a stable growth rate.
4. The relationship between capital spending and depreciation changes consistently with the growth rate.
The user should enter the following inputs:
1. Length of each growth phase
2. Growth rate in each growth phase
3. Capital Spending, Depreciation and Working Capital in each growth phase.
4. Costs of Equity in each growth phase
Inputs to the model
General Inputs
Current Earnings per share =(in currency)
Current Dividends per share =(in currency)
Current Capital Spending/sh =(in currency)
Current Depreciation / share =(in currency)
Current Revenues/ share =
Working Capital/ share =(in currency)
Chg. Working Capital/share =
Do you want to enter cost of equity directly?(Yes or No)
If yes, enter the cost of equity =(in percent)
Beta of the stock =
Riskfree rate=(in percent)
Risk Premium=(in percent)
Earnings Inputs
Growth Rate during the initial high growth phase
Enter length of extraordinary growth period =(in years)
Do you want to use the historical growth rate?(Yes or No)
If yes, enter EPS from five years ago =(in currency)
Do you have an outside estimate of growth ?(Yes or No)
If yes, enter the estimated growth:(in percent)
Do you want to calculate the growth rate from fundamentals?(Yes or No) If yes, enter the following inputs:
Net Income Currently =(in currency)
Interest Expense Currently =(in currency)
Book Value of Debt =(in currency)
Book Value of Equity =(in currency)
Tax Rate on Income=(in percent)
ROC =
Retention =
(Yes or No)
ROC =
Retention =
(Yes or No)
ROC =(in percent)
Interest Rate=(in percent)
Historical Growth Rate =(in percent)
Outside Prediction of Growth =(in percent) Fundamental Estimate of Growth =(in percent)
Growth Rate during the transition period
Enter length of the transition period =(in years)
Do you want the beta to adjust gradually to stable beta?(Yes or No) If no, enter the beta for the transition period =
Growth Rate during the stable phase
Enter growth rate in stable growth period?(in percent)
Will the beta change in the stable period?(Yes or No)
If yes, enter the beta for stable period =
Capital Spending, Depreciation & Working Capital
Do you want all these items to grow at the same rate as earnings ?(Yes or No) If not, enter the growth rates for each of the following items:
High Growth(in percent)
(in percent)
Stable Growth(in percent)
(Yes or No)
Do you want to use the current debt ratio as your desired mix?(Yes or No) If no, enter the following inputs for financing mix,
(in percent)
(in percent)
Stable Growth Inputs for Capital Expenditures and Depreciation
Is capital spending to be offset by depreciation in stable period?(Yes or No) Do you want to compute your reinvestment rate from fundamentals?
Return on equity in stable growth period
If no, enter capital expenditures as % of depreciation in steady state:
Output from the program Initial High Growth Phase
Cost of Equity =
Current Earnings per share=
Proportion of Debt: Capital Spending (DR)=
Proportion of Debt: Working Capital (DR)=
Current Earnings per share=
(Capital Spending - Depreciation)*(1-DR)
Change in Working Capital * (1-DR)
Current FCFE
Growth Rate in Earnings per share - Initial High Growth phase
Historical Growth =
Outside Estimates =
Fundamental Growth =
Weighted Average
Growth Rate in capital spending, depreciation and working capital
Growth rate in capital spending =
Growth rate in depreciation =
Growth rate in revenues =
Working Capital as percent of revenues = (in percent)
The dividends for the high growth phase are shown below (upto 10 years)
Year1234 Earnings$1.02$1.22$1.47$1.76 (CapEx-Depreciation)*(1-DR)$0.20$0.24$0.29$0.35 Chg. Working Capital *(1-DR)$0.85$1.02$1.22$1.47 FCFE($0.03)($0.04)($0.05)($0.06) Present Value($0.03)($0.03)($0.03)($0.04)
Transition period (upto ten years)
Year6789 Growth Rate18.50%17.00%15.50%14.00% Cumulated Growth18.50%38.65%60.13%82.55% Earnings$2.51$2.93$3.39$3.86 (CapEx-Depreciation)*(1-DR)$0.50$0.59$0.68$0.77
Chg. Working Capital *(1-DR)$1.96$2.13$2.27$2.37 FCFE$0.05$0.22$0.44$0.72 Beta 1.08 1.06 1.04 1.02 Cost of Equity12.94%12.83%12.72%12.61% Present Value$0.02$0.09$0.16$0.24 End-of-Life Index
Stable Growth Phase
Growth Rate in Stable Phase =
FCFE in terminal year =
Cost of Equity in Stable Phase =
Price at the end of growth phase =
Present Value of FCFE in high growth phase =
Present Value of FCFE in transition phase =
Present Value of Terminal Price =
Value of the stock =
T MODEL
rowth - an initial a final period of stable
percent: > 100%)
5
$2.12
$0.42
$1.76
($0.07)
($0.04)
101112131415 12.50%11.00%9.50%8.00% 6.50% 5.00% 105.37%127.96%149.62%169.59%187.11%201.47% $4.34$4.82$5.28$5.70$6.07$6.38 $0.87$0.96$1.06$1.14$1.21$1.28
Three-stage FCFE Model
$2.41$2.39$2.29$2.11$1.85$1.52
$1.06$1.47$1.93$2.45$3.00$3.58
10.980.960.940.920.90.9 12.50%12.39%12.28%12.17%12.06%11.95%11.95% $0.32$0.39$0.46$0.52$0.56$0.60
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